When buying or selling a business or any of a business’s assets under New York law, potential successor liability of the buyer is a primary concern.
Successor liability means liability that the buyer of a business’s assets may have for the acts or liabilities of the seller of those assets performed prior to the purchase. Essentially, a buyer would be compelled to pay off debt that the seller accumulated prior to completion of the transaction. The general rule in New York is that the buyer of a business’s assets does not assume and is not liable for the seller’s liabilities unless otherwise expressly stated in the purchase and sale agreement.
However, there are exceptions:
1. Express or Implied Assumption by Buyer. This exception requires that either the asset purchase agreement explicitly states on its face that a buyer assumes some or all of the seller’s liabilities or that some action by the buyer implies an intention to assume the seller’s liabilities in whole or in part. However, the opposite is also true. Express language in the agreement stating that a buyer will not be responsible for seller’s liabilities indicate no express or implied assumption of Seller’s liabilities. Thus, it is important to any buyer of business assets in New York make a clear writing about assumption of seller’s liabilities.
2. De Facto Merger Doctrine. Under New York Law, the “de facto merger doctrine” creates successor liability when the asset purchase is a merger in substance, if not in form. A court will find successor liability under the de facto merger doctrine when:
- the owners of the seller continue operations as the owners of the buyer;
- the seller discontinues its operations or dissolves soon after completion of the the asset sale;
- the buyer assumes liabilities necessary for the uninterrupted continuation of the acquired business’s operations; and
- there is substantial continuity of the seller’s management team, physical location, assets and general business operation.
3. Fraud. Courts look for some indication of fraud to determine whether a transfer of business assets was a fraudulent attempt to evade creditors. Examples that would lead a court to find a fraudulent intent include finding a close relationship among the parties to the transaction, inadequacy of consideration, the use of dummy or fictitious names, or a secret or hasty transaction not in the usual course of business.
The best protection from successor liability is a clearly drafted agreement written by experienced business attorneys who know the applicable law in the jurisdiction.
*Gene Berardelli may be contacted at: GeneBerardelli@ipglegal.com.
Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.
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